The Failure to Prosecute Bank Crimes Creates a Disease at the Heart of Our Politics

The news about Massachusetts and Nevada potentially having to give up foreclosure fraud suits in order to join the servicing settlement brings up a larger point I’d like to make. Some people criticized me for this post about the “substantial” payment of the settlement using investor money, saying that it read more like a Wall Street Journal story than something on a progressive website. The implication here is that the top-line priority should be relief for homeowners who were damaged in the crisis, and not necessarily whether banks pay or investors pay.

I actually don’t think that’s right, and I suspect a large swath of the progressive community would agree with me on this. I’m going to try and explain my reasoning.

One of the dominant, if not the dominant, feature of the past decade or so of American politics has been lack of accountability. The issues involved range from supporting the Iraq war to committing acts of torture to the economic crash. But the core value being transgressed is the same: the perpetrators of the dishonest, illegal, and damaging acts never get held accountable. As Inside Job director Charles Ferguson writes in a masterful post,

It has now been three and a half years since the financial crisis of September 2008… In Mr. Obama’s three years in office, not a single U.S. bank or senior financial executive has been convicted of any crime (or even prosecuted), or had their assets confiscated.

The various task forces and commissions of inquiry empowered to do this job were toothless at best. The SEC, to use one example, has been actively harmful, granting exemptions to violations of securities fraud and steering through settlements that don’t even force the guilty party to admit wrongdoing. In fact, the SEC continued to bestow special privileges to firms that violated securities laws. The current enforcement chief, Robert Khuzami, was the general counsel for Deutsche Bank when they were designing the securitization fraud schemes over which Khuzami, in his role co-chairing the new RMBS working group on which Eric Schneiderman will also serve, is supposed to be investigating.

All of this – the revolving door, the lack of accountability, the absurd profits and bonuses that returned to Wall Street before any recovery took hold elsewhere, have frustrated and angered people who want to see some sign of a functioning government on these issues. They have become deeply cynical by years of neglect and implicitly sanctioned abuse. And they want to see, for once, an enforcement action where the banks actually pay for the damage they caused.

Some would argue that this is merely bloodthirsty. The key, in this telling, is that homeowners get the relief they need. By settling on foreclosure fraud issues and continuing a robust and aggressive investigation on securitization and origination issues, you can build that “second table,” to force the banks to deliver more relief to homeowners. That will be a measure of accountability, with the banks paying to help the people they hurt.

But here’s the thing. When we talk about this settlement, we’re talking about waving away pervasive conduct over a decade if not more, which has made a mockery of state courts, allowed banks to avoid billions in recording fees and compromised the land titling system in America for private property, something that economist Hernando de Soto believes is the fundamental building block of civilization and the basis for the rule of law. If you give a pass on that, even as we move to a next stage and try to preserve claims and investigations for later, you are allowing these compromises and breakdowns to occur without making those responsible have to suffer much at all.

That just isn’t going to fly with a mass of people. Moreover, it’s very bad economics. [cont’d] Simon Johnson in his influential article The Quiet Coup talked about how “breaking the financial oligarchy that is blocking essential reform” is absolutely essential to any ultimate economic recovery. Furthermore, Professor Mary Kreiner Ramirez of Washburn University wrote a compelling white paper about “criminal affirmance,” and the implications of failing to prosecute financial crimes. Basically it invites them to continue.

Recent financial scandals and the relative paucity of criminal prosecutions in response suggest a new reality in the criminal law system: some wrongful actors appear above the law and immune from criminal prosecution. As such, the criminal prosecutorial system affirms much of the wrongdoing giving rise to the crisis. This leaves the same elites undisturbed at the apex of the financial sector, and creates perverse incentives for any successors. Further, this undermines the legitimacy of the rule of law and encourages even more lawlessness among the entire population. These considerations transcend deterrence as well as retribution as a traditional basis for criminal punishment. Affirmance is far more costly and dangerous with respect to the crimes of powerful elites that control large organizations than can be accounted for under traditional nations of deterrence. Few limits are placed on a prosecutor’s discretionary decision about whom to prosecute, and many factors against prosecution are available, especially in resource-intensive white collar crime prosecutions.

Indeed, the fact that robo-signing is still ongoing offers powerful testimony to Ramirez’ argument.

Now, it’s true we don’t live in a perfect world. We have 50 states with jurisdiction over servicing, for the most part, and 50 different personalities in the AG offices who would be in the lead of demanding accountability. As a senior Administration official put it to me, by settling on issues of foreclosure and servicing, which did its biggest damage in sand states where the state partners include Republicans like Pam Bondi of Florida and Thomas Horne of Arizona, who haven’t shown much interest in real accountability, and focusing on issues of securitization, where all the action really takes place in Delaware and New York, with aggressive prosecutors (along with some big states with large pension funds like California and Illinois), there’s a better chance of getting some justice around these issues.

But there’s justice in the form of just compensation and there’s justice in the form of, well, what justice is always described as in a criminal context – deterrence. No financial penalty will do as much to prevent future conduct of this type as a senior executive being sent to jail. And the failure of having accountability on that level is like a festering wound at the heart of our politics. I’ll give Charles Ferguson the last word:

So yes, it’s absurd, and rather disgusting. But it must also be said that President Obama is not alone in prostrating himself before the financial sector. Congress is no better, and neither are Obama’s likely opponents in the presidential race. Newt Gingrich screamed about government interference while he was being paid $1.6 million by Freddie Mac’s chief lobbyist for “conservative outreach.” In Mitt Romney, we have someone who thinks it’s perfectly OK to have a tax rate of 14 percent on over $20 million per year in unearned income, and who wants to increase taxes on the poor while reducing them further for the wealthy. Unfortunately, the power of financial sector money has by now produced a pervasive, bipartisan systemic disease in American politics, of which the president’s recent speech is merely one example among many.

The Failure to Prosecute Bank Crimes Creates a Disease at the Heart of Our Politics

The news about Massachusetts and Nevada potentially having to give up foreclosure fraud suits in order to join the servicing settlement brings up a larger point I’d like to make. Some people criticized me for this post about the “substantial” payment of the settlement using investor money, saying that it read more like a Wall Street Journal story than something on a progressive website. The implication here is that the top-line priority should be relief for homeowners who were damaged in the crisis, and not necessarily whether banks pay or investors pay.

I actually don’t think that’s right, and I suspect a large swath of the progressive community would agree with me on this. I’m going to try and explain my reasoning.

One of the dominant, if not the dominant, feature of the past decade or so of American politics has been lack of accountability. The issues involved range from supporting the Iraq war to committing acts of torture to the economic crash. But the core value being transgressed is the same: the perpetrators of the dishonest, illegal, and damaging acts never get held accountable. As Inside Job director Charles Ferguson writes in a masterful post,

It has now been three and a half years since the financial crisis of September 2008… In Mr. Obama’s three years in office, not a single U.S. bank or senior financial executive has been convicted of any crime (or even prosecuted), or had their assets confiscated.

The various task forces and commissions of inquiry empowered to do this job were toothless at best. The SEC, to use one example, has been actively harmful, granting exemptions to violations of securities fraud and steering through settlements that don’t even force the guilty party to admit wrongdoing. In fact, the SEC continued to bestow special privileges to firms that violated securities laws. The current enforcement chief, Robert Khuzami, was the general counsel for Deutsche Bank when they were designing the securitization fraud schemes over which Khuzami, in his role co-chairing the new RMBS working group on which Eric Schneiderman will also serve, is supposed to be investigating.

All of this – the revolving door, the lack of accountability, the absurd profits and bonuses that returned to Wall Street before any recovery took hold elsewhere, have frustrated and angered people who want to see some sign of a functioning government on these issues. They have become deeply cynical by years of neglect and implicitly sanctioned abuse. And they want to see, for once, an enforcement action where the banks actually pay for the damage they caused.

Some would argue that this is merely bloodthirsty. The key, in this telling, is that homeowners get the relief they need. By settling on foreclosure fraud issues and continuing a robust and aggressive investigation on securitization and origination issues, you can build that “second table,” to force the banks to deliver more relief to homeowners. That will be a measure of accountability, with the banks paying to help the people they hurt.

But here’s the thing. When we talk about this settlement, we’re talking about waving away pervasive conduct over a decade if not more, which has made a mockery of state courts, allowed banks to avoid billions in recording fees and compromised the land titling system in America for private property, something that economist Hernando de Soto believes is the fundamental building block of civilization and the basis for the rule of law. If you give a pass on that, even as we move to a next stage and try to preserve claims and investigations for later, you are allowing these compromises and breakdowns to occur without making those responsible have to suffer much at all.

That just isn’t going to fly with a mass of people. Moreover, it’s very bad economics. Simon Johnson in his influential article The Quiet Coup talked about how “breaking the financial oligarchy that is blocking essential reform” is absolutely essential to any ultimate economic recovery. Furthermore, Professor Mary Kreiner Ramirez of Washburn University wrote a compelling white paper about “criminal affirmance,” and the implications of failing to prosecute financial crimes. Basically it invites them to continue.

Recent financial scandals and the relative paucity of criminal prosecutions in response suggest a new reality in the criminal law system: some wrongful actors appear above the law and immune from criminal prosecution. As such, the criminal prosecutorial system affirms much of the wrongdoing giving rise to the crisis. This leaves the same elites undisturbed at the apex of the financial sector, and creates perverse incentives for any successors. Further, this undermines the legitimacy of the rule of law and encourages even more lawlessness among the entire population. These considerations transcend deterrence as well as retribution as a traditional basis for criminal punishment. Affirmance is far more costly and dangerous with respect to the crimes of powerful elites that control large organizations than can be accounted for under traditional nations of deterrence. Few limits are placed on a prosecutor’s discretionary decision about whom to prosecute, and many factors against prosecution are available, especially in resource-intensive white collar crime prosecutions.

Indeed, the fact that robo-signing is still ongoing offers powerful testimony to Ramirez’ argument.

Now, it’s true we don’t live in a perfect world. We have 50 states with jurisdiction over servicing, for the most part, and 50 different personalities in the AG offices who would be in the lead of demanding accountability. As a senior Administration official put it to me, by settling on issues of foreclosure and servicing, which did its biggest damage in some states where the state partners include Republicans like Pam Bondi of Florida and Thomas Horne of Arizona, who haven’t shown much interest in real accountability, and focusing on issues of securitization, where all the action really takes place in Delaware and New York, with aggressive prosecutors (along with some big states with large pension funds like California and Illinois), there’s a better chance of getting some justice around these issues.

But there’s justice in the form of just compensation and there’s justice in the form of, well, what justice is always described as in a criminal context – deterrence. No financial penalty will do as much to prevent future conduct of this type as a senior executive being sent to jail. And the failure of having accountability on that level is like a festering wound at the heart of our politics. I’ll give Charles Ferguson the last word:

So yes, it’s absurd, and rather disgusting. But it must also be said that President Obama is not alone in prostrating himself before the financial sector. Congress is not better and neither are Obama’s likely opponents in the Presidential race. Newt Gingrich screamed about government interference while he was being paid $1.6 million by Freddie Mac’s chief lobbyist for “conservative outreach.” In Mitt Romney, we have someone who thinks it’s perfectly OK to have a tax rate of 14 percent on over $20 million per year in unearned income, and who wants to increase taxes on the poor while reducing them further for the wealthy. Unfortunately, the power of financial sector money has by now produced a pervasive, bipartisan systemic disease in American politics, of which the president’s recent speech is merely one example among many.